Interconnectedness among commodities, the real sector of Ghana and external shocks

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We examine the degree of causality and interdependencies between three commodities (cocoa, Brent crude oil and gold) and three economic indicators (Bank of Ghana composite index for economic activities, Global Economic Policy Uncertainty and inflation). Hence, the wavelet techniques – bi-wavelet, partial wavelet and wavelet multiple are employed. In this way, we explore time-frequency and frequency-dependent analyses. We document a mixture of positive and negative bi-causality between the commodities and the economic indicators in time-frequency. Specifically, we find that the commodities positively contribute to economic activities, but not substantial. Also, gold causes an increase in inflation rate in the medium-term from 2006 to 2011, and vice versa for cocoa and crude. Notwithstanding, beyond 2019, the comovements between the commodities and inflation were assessed to be negative with all the commodities acting as leading variables. Despite the aforesaid, Global Economic Policy Uncertainty (GEPU) has the most adverse impact on the commodities, as well as, a long-term influence on the remaining variables as revealed by the wavelet multiple. It is recommended that Bank of Ghana sets a specific target for short-, medium-, and long-term inflation rate that takes into consideration movements of the commodity prices, and shocks from the GEPU index. Also, policymakers should institute country-level policies to minimise the adverse impact of external uncertainty shocks. The maintenance of price stability with growth in economic activity in perspective, coupled with policies that can withstand shocks from the external environment would boost the economy to become attractive for domestic and foreign investments. Our findings also divulge that investors may find diversification, hedge and safe haven benefits in the commodities. Moreover, they can effectively hedge against adverse fluctuations in inflation with gold.